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Dollar General enters race for Family Dollar with $8.95 billion bid

New bid for Family Dollar Stores from Dollar GeneralCompetition in the dollar store industry in the US has been intensifying

Dollar General has offered to buy Family Dollar Stores for $8.95 billion, trumping Dollar Tree $8.5 billion bid, to strengthen its position as the biggest discount retailer in a highly-competitive US market.

Analysts said a bidding war was in the offing and Dollar General was likely to win.

Dollar General said the deal would create a retailer with nearly 20,000 stores in 46 US states and sales exceeding $28 billion.

"We have a tremendous amount of strength in the rural communities and we have things to learn in the metro and Family Dollar is just the reverse," chief executive Rick Dreiling said on a conference call.

Family Dollar's presence is biggest in Texas and the eastern US. Dollar General has over 1,000 stores in Texas.

Dollar General's offer, made in a letter to Family Dollar's board, represents a premium of 3.2% to Family Dollar's Friday close. The enterprise value of the offer is $9.7 billion, higher than Dollar Tree's $9.2 billion.

Billionaire investor Carl Icahn had pushed Family Dollar to sell itself to Dollar General. Dollar Tree offered last month to pay $74.50 per share in cash and stock.

Since then, Icahn has cut his stake in Family Dollar to 3.6% as of July 30 from 9.4%.

Competition in the dollar store industry has been intensifying, with Wal-Mart Stores opening small-format stores to woo penny-pinching shoppers in a weak US economy.